Romano Lecture: "Collective Action by Contract: Prior Appropriation and the Development of Irrigation in the Western United States"

Abstract:We analyze the economic determinants and effects of prior appropriation water rights that were voluntarily implemented across an immense area of the U.S. West, abruptly replacing common-law riparian water rights. The analysis reveals institutional innovation that informs both our understanding of the development of property rights, prior appropriation and contemporary water policy.

Water UCI Colloquium Series: "Collective Action by Contract: Prior Appropriation and the Development of Irrigation in the Western United States"

Abstract: Dr. Gary Libecap analyzes the economic determinants and effects of prior appropriation water rights that were voluntarily implemented across a vast area of the US West, abruptly replacing common-law riparian water rights. We build upon Ostrom and Gardner (1993) and model irrigation as a coordination problem to show how the features of prior appropriation were necessary to support welfare-increasing contracts for securing and sharing water and financing irrigation infrastructure among numerous, heterogeneous agents. We construct novel dataset of 7,800 rights in Colorado, established between 1852 and 2013 including location, date, size, infrastructure investment, irrigated acreage, crops, topography, stream flow, soil quality, and precipitation to test the predictions of the model. Prior appropriation doubled infrastructure investment and raised the value of agricultural output beyond baseline riparian rights. The analysis reveals institutional innovation that informs both our understanding of the development of property rights, prior appropriation, and contemporary water policy.

Research Group on Political Institutions and Economic Policy

"Collective Action by Contract: Prior Appropriation and the Development of Irrigation in the Western United States"

"How did we get the Water System we have and what are the Implications for Contemporary Water Policy?"

Abstract: Depending on how measured, agriculture may consume 60% of California’s water. With drought reducing supplies and growing urban, environmental and recreational demands, pressures exist to reallocate water. This can come from market exchange based on existing property rights or from regulatory mandates. The former is likely to meet long-term reallocation objectives at lower cost than the latter. The contentious, 20-year battle to shift water from Los Angles to the Mono Basin illustrates the costs of reallocation via regulatory mandates. If water markets are to be used for reallocation today that exchange will be based on prior appropriation water rights. These rights have been criticized as historical anachronisms and inflexible, but in fact they do facilitate exchange. It is useful to understand how California, and indeed, the western US (and Canada) came to adopt prior appropriation rights. The prior appropriation doctrine (first in time, first in right) replaced common-law riparian water rights in an immense area of 1,808,584 mi2 on the western frontier within 40 years, a rare and dramatic voluntary shift in rights regimes that suggests large economic benefits. The analysis, based on Leonard and Libecap (2016), focuses on Colorado, one of the first states to implement prior appropriation and with complete water rights data from 1852 to 2013. We develop a model to demonstrate that when information about resources is costly, prior appropriation facilitates socially-valuable search, coordination, and investment by reducing uncertainty about resource conditions and the threat of new entry. We derive testable hypotheses and test our hypotheses using a novel dataset that includes the location, date, and size of water claims along with measures of infrastructure investment, irrigated acreage, crops, topography, stream flow, soil quality, precipitation, and drought. We find that prior appropriation lowered search costs for subsequent claimants. Moreover, secure property rights to water and controls on new entry doubled average infrastructure investment and raised total irrigated acreage and value of agricultural output by approximately 134% across western states, relative to a hypothetical riparian baseline. The economic returns to prior appropriation were lower in Hispanic areas of Colorado where pre-existing informal sharing norms were in place and where formal rights were not required to coordinate investment and resource management. The analysis indicates why prior appropriation rights are dominant today. Given the long-term ownership expectations associated with prior appropriation, water reallocation that is not based on them could lead to significant economic disruption and cost in achieving California’s emerging water allocation objectives.

“ENVIRONMENTAL EXTERNALITIES AND COASEAN EXCHANGE”

Abstract: I follow the development of the literature and policy recommendations on open access problems: taxes, subsidies, regulation. I then turn to implicit criticisms of these approaches by Elinor Ostrom, Oliver Williamson, and especially Ronald Coase. I augment transaction costs by adding those in lobbying politicians and the bureaucracy. Because interest groups, politicians, and agency officials do not bear the full social costs of their actions, there is a second source of externality along with market failure—government failure. Potential distortions have been neglected in the literature. Vincent Ostrom’s work is a basis for understanding bureaucratic behavior. I then examine how the literature and policy have responded to Coase’s arguments, particularly with cap and trade schemes. I argue that neither have fully incorporated transaction costs in property rights definition and market design. This has important implications for market performance. I conclude with recommendations for further research.

FATE OF THE EARTH SYMPOSIUM, MICHIGAN STATE UNIVERSITY, APRIL 2015.

Abstract: Common pool resources (CPRs) potentially suffer from over exploitation that arise when parties do not bear the full costs of their actions. Fisheries are over harvested, oil pools and aquifers are over depleted, forests are over logged, and there are too many greenhouse gas (GHG) emissions. These CPR problems are addressed successfully and rapidly in some cases, but not in others. In general we often observe delay and incomplete mitigation. The high transaction costs of reaching agreement on collective action explains why this occurs. Mitigation imposes costs and provides benefits, but these costs and benefits are not proportionately distributed among the parties involved. Some bear more costs than benefits and some more benefits than costs and this leads to differential incentives to support collective action. Four factors contribute to varying assessment of the benefits and costs of mitigation: uncertainty, different perceptions of the problem and preferences for taking action, differences in information about the problem and the costs of addressing it, and questions of compliance. Three Nobel Prize Winners in Economics provide guidance regarding how to analyze these issues: Ronald Coase (1991), Elinor Ostrom (2009), and Oliver Williamson (2009). Smaller CPRs often have successful collective action: less uncertainty, similar preferences and perceptions, similar information, and compliance. Larger CPRs have a mixed record: more uncertainty, different preferences, perceptions and information, and limited compliance. The empirical record includes oil fields, aquifers, fisheries. Ironically, a crisis (collapse of the fish stock, plummeting primary oil production, jump in pumping costs and subsidence for groundwater) promotes collective action. A crisis narrows differences on the benefits and costs of taking action and lowers the transaction costs of collective action. This empirical record of the role of crises may be instructive for major global CPRs, where collective action has not been forthcoming: protection of highly-migratory fish stocks and controls of GHG emissions. Differences across countries in assessment of the benefits of mitigation and in willingness to bear costs have limited cross-national action. A crisis may be necessary to narrow international bargaining positions. This analysis suggests that preemptive collective mitigation is unlikely and that successful international efforts may require a crisis, despite its costs.